When
it comes to the deadly details, millions of Americans could be in for
an unpleasant surprise. During the election campaign, President-elect
Barack Obama promised--repeatedly--that Americans who already had
health insurance would not face any changes in their coverage and that
their costs would go down, saving the typical family $2,500 annually in
premiums.[1]

It
turns out, however, that these promises cannot be fulfilled. Under the
health reform plan that the President-elect has outlined, including
variations of his basic approach that have been refined by Senator Max
Baucus (D-MT) and former Senator Tom Daschle (D-SD), President-elect
Obama's pick for Secretary of Health and Human Services, millions of
Americans will indeed lose their existing coverage, and the promised
premium savings are unlikely to materialize.

The reason is that
Obama has proposed (1) the creation of a new national health plan, run
by the federal government and financed by the taxpayers; (2) an
employer mandate enforced by a payroll tax; and 3) a congressionally
created national health insurance exchange in which the public health
plan, subsidized by taxpayers and armed with special advantages, would
compete unfairly with private health insurance.[2] The result would be a massive crowd-out of private health insurance coverage, especially employer-based coverage.

Ugly Scenarios.
There are differences, of course, among the plans advanced by these
three gentlemen. For example, Senators Baucus and Daschle, unlike
Obama, favor the imposition of an individual mandate on adult Americans
to buy health insurance. But such a mandate is not nearly as
consequential as a whole new government health plan. As The Wall Street Journal has noted:

The
irony is that the public option--not the mandate--is far and away the
most radical part of the plan. Green eyeshade objections are obviously
out of favor in modern Washington, but the reality is that the
Baucus-Obama plan would be extraordinarily expensive as it slowly but
relentlessly grew the government's share of health spending.[3]

Most
Americans under the age of 65 get private health insurance through
employment, and the overwhelming majority of them are satisfied with it.[4]
The vast majority of American voters oppose any kind of
government-controlled health plan if it means that they have to change
their own health insurance coverage.[5] Only a small minority of Americans with insurance--15 percent--would be
willing to switch to some form of government health insurance.[6]
But the combination of a public health plan and a new tax or mandated
coverage by the employer would prove disastrous for millions of
individuals and families enrolled in employer-based coverage. In an
employer-based health insurance system, of course, employers, not
employees, decide whether to continue or terminate coverage.

Big Impact.
There are already tens of billions of dollars in cost-shifting from
existing public health programs, Medicare, and Medicaid to individuals
and families enrolled in private health insurance. The introduction of
a new public plan, assuming payment levels below market rates, would
aggravate and increase these costs. Once again, details are crucial.

But
beyond greater cost-shifting to private insurance is the very real loss
of private health insurance coverage itself. In an October 2008
analysis, the Lewin Group, a nationally prominent econometrics firm
based in Virginia, estimated that the Obama plan would indeed
significantly reduce the number of the uninsured, with 26.6 million
additional Americans getting coverage by 2010. Lewin also estimated
that the Obama plan would dramatically alter the way in which many
Americans would be covered: 21.6 million Americans would lose their
private coverage, but an estimated 48.3 million would end up in public
coverage through the new government health plan, as well as through the
State Children's Health Insurance Program (SCHIP) and Medicaid, which
is a welfare program.[7]
In the course of this new configuration of American health insurance
coverage, Lewin estimated, 18.6 million employees would find themselves
in the new government plan as employers switched to it from private
health insurance.[8]

More
recently, the Lewin Group elaborated on the impact of a new government
health plan offered in competition with private health plans and
outlined the dramatic consequences, both for private coverage and for
revenues earned by doctors and hospitals.[9]
Under any scenario, Lewin estimated a crowd-out, or displacement of
private health insurance, with the introduction of a new public plan.
Key factors determining the impact would be the size of the eligible
pool of employees and their dependents; the payment levels adopted by
the new government plan; and whether those levels would be private
payment levels, Medicare payment levels, or at midpoint between private
payment and Medicare payment.

In calculating the alternative scenarios, the Lewin Group provided a range of potential impacts:

Lost Private Coverage.
With eligibility limited to employees in small firms and to individuals
and the self-employed, at midpoint payment levels, an estimated 31.5
million persons would be enrolled in the government health plan, and an
estimated 21.5 million would be switched out of private coverage. If
the payment levels in the public plan were the same as Medicare,
enrollment in the government plan would jump to 42.7 million, and a
total of 31.8 million would be transitioned out of private coverage.

If all employees were eligible for enrollment in the government plan,
at Medicare payment levels, the shifts would be massive: 130.5 million
Americans would be enrolled in the government plan, and 118 \.5 million
would lose or be switched out of private health coverage. While some
people might choose to join the public plan, many would have little or
no choice in the matter, since their employers would drop their
coverage.

Lost Hospital Revenues. If eligibility
for enrollment in a public plan was opened to all employees and
payments were at a level midpoint between private and Medicare payment,
hospitals would find themselves with a net reduction in payment of $7.3
billion in 2009. If all employees were eligible at Medicare payment
levels, hospitals would see a net reduction in payment of $36.5 billion
in 2009.

Lost Physician Revenues. Doctors already
struggle with Medicare and Medicaid payment levels, and medical
practice would be further constrained by the introduction of a new
government health plan. If all employees were eligible for enrollment
in such a plan, and if such a plan paid at Medicare payments levels,
doctors would see a net reduction in their paymentof $36.4 billion in
2009.

Details Matter. The President-elect's
rationale for the provision of a new government plan is that it would
give those Americans not enrolled in employment-based health insurance
coverage, or those with insecure coverage, the opportunity to obtain
stable, affordable health insurance with a guaranteed set of
government-standardized benefits. But while it might look like a
prescription for consumer choice and competition, the reality is very
different.

Consider the components: a powerful regulatory body
that runs a proposed National Health Exchange, enforcing a single set
of rules; a rigged competition between private health plans and a
government health plan that enjoys special advantages and potentially
unlimited taxpayer subsidies; and another powerful federal agency--a
board, council or institute--determining what medical services and
benefits would be covered and reimbursed in Americans' health
insurance. In the new public plan, as is the case for Medicare and
Medicaid, costs would doubtless be controlled by cutting payments for
medical goods and services, thus reducing their availability.

Given
the structure, function, and dynamics of such a combination of
proposals, the result would surely be a rapid evolution toward either a
single-payer system of national health insurance or, at the very least,
a highly regulated and painfully sluggish, centrally controlled system
of health care in which private health plans and private medical
practice are private in name only. Meanwhile, millions of Americans
would lose their employer-based health insurance, and the artificially
swollen and heavily subsidized government health plan would remain as
the benchmark for "private" decisions concerning financing, benefits,
and standards within the new National Health Exchange.

What a New Public Plan Would Look Like

There
are two broad, yet very different, models for a government health plan
among the leading health reform proposals: Medicare and the Federal
Employees Health Benefits Program (FEHBP).

Under an earlier
proposal advanced by theCommonwealth Fund, a prominent liberal think
tank based in New York, the new government health plan would be
"Medicare Extra," a plan based on Medicare for the under-65 population.
Under Senator Baucus's proposal, the new public plan would also
resemble Medicare.Under Senator Daschle's proposal, the new plan would
be created by his proposed Federal Health Board, a powerful independent
government agency, in consultation with Medicare officials.

Under
President-elect Obama's proposal, the new public plan would be created
by Congress with benefits similar to those found in the FEHBP and would
compete with private plans in the National Health Exchange. While Obama
has not been very specific about the functions of the Exchange, he has
made it clear that it is to be a "watchdog," a powerful regulatory as
well as administrative agency, and that it would enforce a common set
of insurance and health policy rules, including guaranteed issue,
rating limitations, and payment rules for health insurance, as well as
rules governing benefits, quality, and efficiency standards.

In
Obama's proposal, small businesses and individuals without access to
group coverage through their workplace would be eligible for enrollment
in the new public plan, as would those who are ineligible for existing
public health programs such as Medicaid and SCHIP. Like Baucus and
Daschle, Obama proposes combining a public health plan with an employer
mandate, whereby employers who do not or cannot afford to offer private
coverage are required to pay an as yet unspecified tax that would, in
turn, help to finance coverage in the public program.[10]

Under
Obama's proposal, insurance rules would include guaranteed coverage,
including the elimination of any restrictions on pre-existing medical
conditions, as well as a requirement that the public plan and its
competitors offer a fair set of premiums with minimal co-payments.
Rules would apply to the new government plan and presumably any of the
government plan's private competitors. For low-income people, special
premium subsidies would allow them to enroll in the new public plan and
the private health plans that would compete with it in the National
Health Exchange.

A Medicare Model. Senator Baucus, as noted, has said that he favors a new public plan "similar to Medicare."[11] Likewise, Senator Daschle has called for a public plan to be developed
by his proposed Federal Health Board in consultation with Medicare
officials.

Details matter. In developing a public health plan,
Congress would have to determine whether the plan should really be
"like" Medicare or whether it should simply expand Medicare itself as
proposed by a sizeable number of congressional champions of a
single-payer system of national health insurance. As a practical
matter, Medicare expansion would be the easiest and simplest option,
but it would also mean expanding a financially troubled government
program that is already facing disastrous liabilities.

Governance.
If a simple expansion of Medicare is not on the table, the task becomes
a bit more challenging. If Congress were to create a new public plan
"like Medicare," then Congress would have to decide on its governance
and presumably would recreate a system of central planning and
administrative pricing that is at least broadly similar to the system
that characterizes the existing Medicare program. This would include
centralized benefit setting, financing, and regulation (a vast regime
of rules, regulations, and guidelines, which consume tens of thousands
of pages); Medicare-style decision-making with respect to medical
necessity and appropriateness of medical services for reimbursement,
claims processing and denial, or conditions that determine when and how
patients could legally contract with private physicians outside the
Medicare-like plan (if such private contracting were permitted at all);
Medicare-style audits and investigations for fraud and abuse; and the
often laborious grievance and appeals process for denial of patients'
medical services or physicians' reimbursements.

Medicare's governance problems are legendary,[12]
but it is unlikely that Congress could invent a Medicare-like program
without reinventing the managerial and administrative paraphernalia and
the inflammatory process of political decision-making that
characterizes Medicare, including the ugly special-interest pleading,
unless it were to abdicate its responsibilities for governing the new
program and transfer them, as Senator Daschle has recommended, to a
super agency, proudly unaccountable to doctors or patients and
"insulated" from normal political influence in its disposition of
benefits, drugs, or medical treatments.

This is, of course, the idea behind the parallel creation of a supremely powerful council, institute, or Federal Health Board.[13] The notion that a politically appointed body would also be "insulated" from politics is charmingly naïve.

Benefit Setting.
Based on Medicare's historical record, health benefit setting,
particularly the adoption of new therapies, devices, or medical
technologies, does not occur as rapidly in Medicare as it does in
private health insurance. In fact, Medicare's benefit setting is often
a slow and highly politicized process. The addition of a significant
medical benefit in the Medicare program or a change in its payment rate
often becomes a point of highly contentious congressional debate, as
evidenced by the long and bitter multiyear battle over the addition of
a Medicare drug benefit, which reached a fever pitch in the enactment
and then the rapid repeal of the Medicare Catastrophic Coverage Act of
1988 and culminated in the enactment of the Medicare Modernization Act
of 2003.

In creating a new public health plan, if Congress (as
the board of directors of this new plan) does not transfer its
responsibilities to a separate and powerful board or council as
recommended by Daschle and Baucus, respectively, it must determine how
precisely it would address breakthroughs in medical innovation and the
fruits of that innovation in the form of medical benefits and
treatments. If a new treatment becomes available and is priced
according to market conditions in private plans, either Congress or a
body authorized by Congress must first determine whether it will become
available in the public plan (not a sure thing) and then decide how the
treatment will be priced and under what conditions it will be
reimbursed.

Once again, the idea behind the public health plan,
at least as presented by its champions in the incoming Administration
and Congress, is that it would compete directly with private health
plans for the allegiance of employers--who will make the business
decision to enroll their employees--or employees who do not have
employer-based coverage or are self-employed. But any serious market
competition would require a level playing field for the competitors. In
order to create and maintain this level playing field, any benefit
standard established in the public plan would also be applied to
private health plans.

Congress, therefore, would have to mandate
an equality of benefits at some level between the public plan and the
private plans, and that would require either adding or subtracting
benefits or fixing the prices for these benefits by legislative action
to keep the contest at least superficially fair. As Michael Tanner, a
senior fellow at the Cato Institute, has observed, "Private insurance
companies would still exist, but they would operate much like public
utilities with the government involved in deciding what benefits they
offer, what they can charge, and how they operate."[14]

Tanner's
observation, however, begs an obvious question: If the rules and
standards, financing and benefits, reserve and solvency requirements,
and consumer protections and guarantees are all the same for competing
private plans and the public plan, then, logically, why should there be
a public plan at all? A common set of market rules for insurers would
be sufficient to achieve whatever public good is envisioned to ensure
affordable coverage and fair competition. Otherwise, it would seem that
the only reason to create a public plan would be simply to have a public plan--a meaningless exercise, unless the goal is public monopoly.

Payments.
A second major issue for Congress to settle is the crucial one of how
exactly it would set payments and prices of medical services in a new
"Medicare-like" plan. In the Commonwealth Fund's version of the new
government plan, "Medicare Extra," there would be no change: Payments
to doctors and hospitals would be the same as they are in traditional
Medicare.[15]

In
traditional Medicare, medical services and procedures are priced
according to the program's existing system of administrative pricing, a
bewildering alphabet soup of fee schedules and payment formulas: the
Diagnosis Related Groups (DRGs) for hospitals; the Resource Based
Relative Value Scale (RBRVS) for physicians;[16]the Sustainable Growth Rate (SGR) for physician payment updates;[17] and the various administrative payment formulas for medical devices and
Part B drugs. Most Members of Congress are firmly committed to
Medicare's administrative payment systems, regardless of their manifest
weaknesses, strongly opposing even modest reforms like competitive
bidding for durable medical equipment.[18]

Senator Baucus says that he would not use the Medicare payment system for the new government health plan.[19]
Assuming that anything even remotely resembling free-market pricing and
payment for medical goods and services is simply out of the question--a
fair assumption--it is hard to imagine how Congress would begin to
field a Medicare-like plan in competition with private-sector health
plans without Medicare-like payment rules. If Senator Baucus and his
colleagues do not want to use those rules and are not going to embrace
free-market pricing, they would have to develop a new system of
administrative pricing and payment. The problem, of course, is that any
new system of administrative pricing in which free-market forces are
excluded and prices are fixed punishes clinical innovation or
institutionalizes inefficiencies, and taxpayers who fund the government
health plan routinely pay either too much to too little for medical
goods and services.

When the Medicare physician fee schedule was
authorized by the House Ways and Means Committee in 1986 in the face of
determined opposition from the Reagan Administration, it took another
three years for the proposal to be enacted and another five years for
the payment reform to be fully implemented. For Congress, it would be a
formidable task to re-invent an entirely new system of administrative
payment for all medical professionals, as well as for drugs, devices,
and technology, assuming that it would truly be different from Medicare
or Medicaid.

Meanwhile, Congress has been either unwilling or
unable to fix the obviously broken payment systems that now govern the
financially troubled Medicare program. This is especially true of the
physician-payment-update formula, automatically threatening massive
Medicare payment cuts to doctors and setting off the ridiculous annual
spectacle of Congressmen desperate to meet a yearly statutory deadline
in time to undo their own handiwork.

Big Impact. Payment
formulas for the new government plan, like the size of the eligible
pool of enrollees, are crucial details. The degree to which Medicare
payment is reproduced in the new government health plan is profoundly
consequential in its impact on the doctors, hospitals, and
private-sector health plans that are supposed to compete with it.

There
is a big payment gap between public and private health care programs.
Compared to payments in the private commercial markets, Medicare and
Medicaid pay doctors and hospitals significantly less. According to the
Lewin Group, the most recent data indicate that Medicare payments
amount to 81 percent of private payments to doctors, while Medicaid
payments to doctors amount to only 56 percent of private payments.[20] For hospitals, Medicare payment amounts to 71 percent of private payment, while Medicaid payment is 67 percent of private payment.[21]

Artificially
low government payments by Medicare and Medicaid to doctors and
hospitals guarantee that the true costs are shifted back to the private
sector and generate even higher premiums for individuals and families
in their private and employment-based health insurance. According to a
recent report by Milliman Inc., a prominent actuarial consulting firm,
this "hidden tax" amounts to $88.8 billion a year, or an additional
annual cost of $1,788 in insurance for a family of four.[22]

For
individuals and families that would remain in private health insurance,
assuming that their coverage survived, similarly low payment schedules
for a new government health plan would guarantee an even larger shift
to them in higher health care costs. In other words, even if their
coverage remained unchanged, it is highly unlikely that they would see
a promised reduction in their health insurance premiums.

Champions
of the government health plan often claim to be sincerely committed to
"fair" competition between private health plans and their proposed
public plan, but it is impossible to have a functioning national market
in which pricing in one portion of the market (private plans) is driven
by free-market conditions of supply and demand and pricing in the other
(the public plan) is dictated by the government, either in the form of
administrative pricing or through a system of price controls. To
establish a level playing field, Congress would have to refrain from
trying to set prices for thousands of medical treatments and
procedures, as it does today for Medicare, and let the market determine
those prices equally for the public plan and the private plans that are
supposed to compete with it. The government plan and its managers would
have to succeed, and therefore profit from their success in offering
consumers what they want and need, or fail, lose market share, and
absorb losses on their own--in which event, unlike other
government-sponsored enterprises, the public plan should be permitted
to go out of business without another taxpayer bailout: admittedly an
unlikely scenario.

Alternatively, Congress would have to impose
a universal system of administrative pricing on the public and private
health plans alike, thus reintroducing the old Nixonian price controls
for the health care sector of the economy. But importing Medicare- or
Medicaid-style payment systems is also to import the annual
congressional warfare over Medicare payment for doctors and other
medical professionals into what is now left of the private sector. With
government controlling the benefits as well as the price of the
benefits, whether or not the payer is singular or plural, the result
would be a government-run system.

Yet another option is for
Congress simply to let the public health plan, with its
administratively set, artificially low prices, undercut the private
health plans and accelerate employer dumping of millions of employees
into the "cheap" government health plan, thus rapidly driving private
health plans out of business and rapidly eroding the provision of
private health insurance altogether.

FEHBP Model. The
second option for a government health plan actually does not exist,
except in recent political rhetoric, and that is something called the
"FEHBP Plan." President-elect Obama's proposed new public health
insurance program would give "individuals the choice to buy affordable
health coverage that is similar to the plan available to federal employees."[23]

But
Obama would also prescribe a comprehensive standardized benefits
package not only for the public health plan, but also for any private
health plans that would compete with the public plan in his proposed
National Health Exchange. It would be "similar" to the benefit package
available to Members of Congress.

Obama's presentation on this
point is confusing, because in 2008 there were no fewer than 283 health
plans, with different benefit packages, competing in the FEHBP. Under
the FEHBP payment formula, the government, as an employer, makes an
annual defined contribution that by law cannot exceed 75 percent of the
premium costs of any given health plan in the program.

FEHBP
plans differ greatly. For example, for 2009, the Blue Cross Blue Shield
"standard option" plan, one of the most popular of the FEHBP's national
plans, has an annual premium of $13,450, while the Mail Handlers-Value
plan, a union plan offered on a national basis, has an annual premium
of just $5,340. As American Enterprise Institute scholar Joseph Antos
and his colleagues have noted, if the Blues' standard-option FEHBP plan
were to be the fixed standard, the costs of coverage would be very high
for many families:

Families would not be able to purchase less
expensive coverage, since all other insurance would be required to
offer benefits at least as generous as those of the NHP (measured on an
actuarial basis). This would create a large new entitlement, raising
concerns about the fiscal sustainability of reform.[24]

In
the Obama version, enrollees' payments would be standardized to make
sure that premiums are "fair" and that co-payments are "minimal."
Families that are ineligible for Medicaid or SCHIP would receive
low-income subsidies to help them buy coverage either in the public
plan or in the approved private plans that would compete with it in the
National Health Exchange.

Deviation from FEHBP. Few
topics in the American health care policy debate are more subject to
misrepresentation--some of it deliberate, some of it rooted in
ignorance--than the Federal Employees Health Benefits Program.
Americans should not be under any illusions about how the FEHBP
actually works, compared with the way it is often described. There are
three significant differences between President-elect Obama's proposal
and the reality of the FEHBP.

The federal
government does not enter a government-financed health plan into the
competition with private insurers, either nationally or in any of the
states where private health plans compete. The national and state
competition in the FEHBP--to the extent that one wants to liken it to
competition in a health insurance exchange--is a competition among
risk-bearing private health plans only.

The FEHBP is a premium-support system.
There is no such thing as one "benefit package" or an "FEHBP Plan" that
covers Members of Congress. There is a wide variety of packages that
change annually and vary with plan type--ranging from high-deductible
health savings account plans (HSAs) to managed care plans (HMOs and
PPOs) and "fee for service" offerings--and that reflect yearly requests
by the U.S. Office of Personnel Management (OPM), as an employer, in
call letters (the federal government's annual communications to private
health plans) before annual summer negotiations, as well as the
different responses of health insurers in negotiations with the OPM
staff and the ever-changing demand of consumers for health insurance
products. The false impression often left with ordinary Americans is
that there is a very special, single set of idealized health benefits
uniquely and exclusively available to Members of Congress and federal
workers and retirees.

Under Obama's public plan, participants are to be charged "fair" premiums and "minimal co-payments."
In other words, the federal government would, out of necessity, fix
premiums to make them "fair" and standardize other insurance payments.
In the FEHBP, premiums and co-payments are determined by supply and
demand. While the OPM negotiates rates and benefits with private
carriers as an employer, its main regulatory job is consumer protection
of its employees and retirees, which is understood as making sure that
the premiums bear a reasonable relationship to the benefits offered and
that plans are solvent and compatible with basic marketing rules. OPM
does not in any way get into the business of imposing price controls on
premiums or forcing health insurers to adopt a standard set of
co-payments. In this key respect, the Obama proposal differs radically
from the principles and practice of the FEHBP.

How Private Coverage Could Change

Based
on independent assessments, there is no doubt that there would be a
significant reduction in the number of uninsured Americans under
Obama's proposal. There is also no doubt that private health insurance
coverage would erode significantly--that it would be crowded out--with
a government health plan operating within a national health insurance
exchange.

Much would depend on the as yet unknown specifications
that Congress would determine for eligibility for enrollment in the
public plan, the size and scope of the proposed employer mandate and
its tax, the exact functions of the proposed National Health Exchange,
the payment and pricing of medical services in the new government
health plan, and the private plans that are supposed to compete with
it. Again, details matter.

The
Lewin Group recently projected the impact of a new public plan based on
the size of the eligible pool of enrollees and its payment rates. In
terms of eligibility, if employees in small firms, the self-employed,
and individuals were eligible for enrollment in the government health
plan, there would be major increases in enrollment in the government
plan and corresponding declines in private health insurance coverage.
Assuming payment levels for doctors and hospitals at a midpoint between
existing private payment and Medicare payment, Lewin estimates that
enrollment in the national public plan would jump to 31.5 million
Americans, while 21.5 million Americans would either lose their
employer-based coverage or give up private health insurance coverage.[25]
If the government health plan is offered with Medicare payment rates
for doctors and hospitals, which are significantly lower than those
found in the private sector, the impact would be greater: 42.7 million
Americans would enroll in the government plan, and 31.8 million fewer
Americans would have private health insurance.[26]

If employees in all
firms, as well as self-employed persons and individuals, were eligible
for enrollment in the government health plan, the impact would be
enormous. In that case, at payment rates at a midpoint between the
private sector and Medicare, Lewin estimates that 77.5 million
Americans would be enrolled in the government plan, while 67.5 million
Americans would be transitioned out of employer-based or private health
insurance coverage. If Medicare payment rates were adopted in the
government plan and the scope of eligibility was greatly
expanded--encompassing all firms and all self-employed and
other individuals--then the shifts in coverage would be titanic: 130.5
million people would be enrolled in the government health plan, and
118.5 million Americans would no longer have private health insurance.[27]

The Cost of a New Government Plan

With
the creation of a new taxpayer-subsidized public health plan combined
with an employer mandate, as recommended by President-elect Obama and
Senator Baucus, Congress would be imposing new costs on businesses and
almost certainly shifting more costs to private health plans. In the
meantime, federal spending on health care would have to increase
significantly, and their proposed health care delivery reforms would be
unlikely to secure serious cost control.[28]

Fiscal
discipline is unlikely. Senator Baucus has already indicated that the
"pay as you go" rule--requiring spending cuts or tax increases--to
finance health reform may not apply.[29]
Taxpayers are also being promised that health care reform will somehow
pay for itself, based on fanciful projections of future savings from
various delivery initiatives. These savings will probably never
materialize. Based on a rich history of failed government predictions
with respect to health care costs, especially in Medicare, the
projected costs of government health programs are almost always much
greater than the government officials promise.

With regard to
the specific impact of the new government plan itself, there is some
early econometric analysis. The impact on different sectors of the
health care industry, as well as the taxpayers, would vary by the
payment levels and the pool of eligible enrollees in the new government
plan--that is, whether the pool of eligible enrollees would be "broad,"
encompassing employees in all firms as well as individuals and the self-employed, or "narrow" and restricted to employees in small firms as well as individuals and the self-employed.

Another
key factor is the details of the employer mandate: the size and scope
of the mandate and the tax penalty imposed on firms for not offering
health insurance to their employees as prescribed by Congress. Employer
mandates, as economists have generally noted, would result in a
reduction in wages and other compensation for employees and provide
powerful incentives for firms to "dump" employees from private coverage
into public coverage along with the payment of the as yet unknown tax.

For
doctors and hospitals, the costs of the new government health plan in
terms of lost revenues would be balanced somewhat by projected
reductions in payments of administrative costs and uncompensated care
costs as more and more patients were covered by the government's health
insurance program.

Hospitals. According to the Lewin
Group, levels of payment at a midpoint between the private sector and
Medicare would yield a net change for hospitals that would range from a
positive increase of $14.9 billion (assuming a narrower pool of
eligible enrollees) to a negative $7.3 billion. As Lewin estimates,
however, if one assumes Medicare payment levels, the hospital payment
reductions could be drastic: a loss of as much as $36.5 billion
annually based on a broad eligibility of employees in all firms.[30]

Doctors.
For doctors, whether the eligibility pool is broad or narrow, or
whether the payment levels were at midpoint or at Medicare levels,
there would be a net reduction in physician revenues. The most drastic
reduction in physician revenue would come with the adoption of the
government health plan that encompassed employees in all firms as
eligible and paid physicians on the basis of Medicare rates: $36.4
billion in reduced physician revenue.[31]

Taxpayers.
For taxpayers, there is as yet no clear answer to the specific question
of how great the true costs of the new public health plan in
particular, or whatever the incoming Obama Administration and the
congressional leadership propose for health reform in general, will be.

The
new public health plan, however, would be subsidized by the taxpayers,
and the taxpayers would presumably assume all of its risks and
liabilities, including inevitable unfunded liabilities of a health plan
that promises artificially low premiums and co-payments. Unlike many
state legislatures, Congress is unburdened by any legal requirement in
the federal Constitution to balance the federal budget and can
therefore simply make good any yearly losses or expansions by making a
run on the Treasury or relying on deficit financing and the printing
press.

The creation of a new government health plan beyond
Medicare, Medicaid, and SCHIP would entail some hard thinking on the
part of Congress as to how it would finance this new plan and what
measures it would put in place to establish some modicum of fiscal
discipline. It is understandable that some Members of Congress, as
Senator Daschle has claimed, would be tempted to surrender some tough
decisions affecting coverage and related costs to an enormously
powerful Federal Health Board or some other unelected body insulated
from the inflammatory process of democratic decision-making.

The Eternal Bailout.
A new public plan would entail new public liabilities. In any case,
Congress would have to decide whether or not to finance the new plan as
Medicare is financed, put the bulk of spending on autopilot like
spending on physician and drug benefits, and make up losses through
increased taxation or debt. Or Congress would have to develop other
alternatives. Once again, these details matter.

If Medicare
itself or a newly created "part" of Medicare, as some suggest, is to
serve as the new public plan in a national health insurance exchange,
then Congress will have to determine whether its liabilities would be
established separately and apart from the existing Medicare program or
included within it.

From the taxpayers' standpoint, it would not
make much difference: They would still be stuck with a much bigger bill
either way. If liabilities were incurred as part of Medicare, for
example, Congress would be adding to Medicare's long-term debt, which
alone amounts to an enormous $36 trillion.[32]
Yet no one in Congress and no one in either the outgoing Bush
Administration or the incoming Obama Administration has yet indicated
how Americans are going to absorb the hideously high entitlement costs
that have already been incurred.

Conclusion

A new
public insurance plan to compete with private health plans through a
"national health insurance exchange" is a Trojan horse for government
control and the progressive destruction of Americans' private health
insurance coverage.

The creation of a "Medicare-like" plan, in
particular, would entail the creation of a Medicare-like financing
system--a shell game in which prices are held artificially below market
rates while costs are shifted to private carriers and growing
liabilities are shifted to the next generation of taxpayers. Congress
would thus add to entitlement burdens that are already enormous.
Meanwhile, it is indeed hard to imagine how Congress or the
Administration could remain neutral in the national competition with
private health plans: a competition in which they would staff, manage,
and fund their own creation.

President-elect Obama claims that
providing a public plan through a National Health Exchange would
enhance personal choice and health plan competition. That is highly
unlikely. Rather, such a system would erode private health insurance.
Short of a revolution in Washington's thinking, either Congress or a
powerful Federal Health Board operating under its authorization would
become increasingly prescriptive over health benefits, the adoption of
medical technology and new medical treatments and procedures, and the
pricing of these items, as well as the mechanisms that private health
plans may or may not use to manage health care risks.

While
private health coverage would start to disappear more or less rapidly,
hardly any aspect of remaining private health plans' business
operations would be free from government control. That is not a
prescription for the kind of choice or competition that would drive
innovation, improve quality, or enhance the productivity of the health
care sector of the economy. It would severely weaken private health
insurance pools and guarantee a severe loss of economic prosperity
and--most important--personal liberty.

[2] The
prototype of the proposals that Obama, Baucus, and Daschle are
promoting, especially a national health insurance exchange as an arena
for a government plan to compete with private health plans, is the
proposal developed by the Commonwealth Fund, a prominent liberal health
policy group based in New York City. For a description of the
Commonwealth Fund's proposal, see Cathy Schoen, Karen Davis, and Sara
Collins, "Building Blocks for Reform: Achieving Universal Coverage with
Private and Public Group Health Insurance," Health Affairs,
Vol. 27. No. 1 (May/June 2008), pp. 646-657; see also Karen Davis,
Cathy Schoen, and Sara Collins, "The Building Blocks of Health Reform:
Achieving Universal Coverage and Health System Savings," Commonwealth
Fund Issue Brief, May 2008.

[10]In
the Commonwealth Fund proposal, which is an earlier and more detailed
version of the broad policy agenda promoted by Obama, as well as by
Baucus, the payroll tax for business would be 7 percent, and it would
impose an additional annual cost of an estimated $45 billion on
employers who had not previously provided coverage for their employees.
See Davis et al., "The Building Blocks of Health Reform."

[12]See, for example, U.S. General Accounting Office, Medicare Management: CMS Faces Challenges to Sustain Progress and Address Weaknesses, GAO-01-817, July 2001; see also U.S. General Accounting Office, Managing for Results: Federal Managers' Views on Key Management Issues Vary Widely Across Agencies, GAO-01-592, May 2001.

[13]See Tom Daschle, with Scott Greenberger and Jeanne M. Lambrew, Critical: What We Can Do About the Health Care Crisis
(New York: Thomas Dunne Books, 2008); see also Baucus, "Call to
Action," pp. 18-19. For a brief discussion of the proposal for a
powerful board, see Robert E. Moffit, Ph.D., "How a Federal Health
Board Will Cancel Private Coverage and Care," Heritage Foundation WebMemo No. 2155, December 4, 2008, at http://www.heritage.org/research/healthcare/wm2155.cfm.
In a variation on this theme, Senator Baucus recommends that coverage
decisions should be made by an Independent Health Coverage Council.

[16] The
theory underlying the Medicare physician fee schedule is in many
respects an intellectual curiosity. It is based on the 19th-century
notion that there is an "objective" economic value to commodities,
including the labor required to produce goods and services. In the case
of a doctor's provision of medical services, that objective value can
be discovered, outside of the dynamics of a free market, through the
methods of "social science." Social scientists would measure and weigh
the time, energy, and effort necessary for a doctor to produce a
medical service, along with other "inputs," and compare the relative
values of these services on a statistical scale for purposes of
reimbursement regardless of the value or benefit of the service to the
patient. For a further discussion of this idea, see Robert E. Moffit
Ph.D., "Back to the Future: Medicare's Resurrection of the Labor Theory
of Value," Regulation, Vol. 15, No. 4 (Fall 1992), pp. 54-63, at http://www.cato.org/pubs/regulation/regv15n4/reg15n4f.html (December 16, 2008).

[17]Under
the SGR formula, updates in Medicare physician payment are tied
directly to the growth of the national economy; increases in payment
that exceed a target based on national economic growth are cut
automatically the following year. On the SGR, see John S. O'Shea M.D.,
"The Urgent Need to Reform Medicare's Physician Payment System,"
Heritage Foundation Backgrounder No. 1986, December 5, 2006, at http://www.heritage.org/research/healthcare/bg1986.cfm;
see also John S. O'Shea, M.D., "A Predictable Mess: Medicare's
Physician Payment System Offers Lessons Against Drug Price
Negotiation," Heritage Foundation WebMemo No. 1330, January 25, 2007, at http://www.heritage.org/research/healthcare/upload/wm_1330.pdf.

[18] Dancing
to the tune of special-interest lobbying, Congress aborted such a
payment reform in summer 2008, even though it had previously authorized
it in the Medicare Modernization Act of 2003. See Robert E. Moffit,
"Medicare: Congress Is Poised to Block Competitive Bidding for Medical
Supplies," Heritage Foundation WebMemo No 1959, June 18, 2008, at http://www.heritage.org/research/healthcare/upload/wm_1959.pdf.

[19] But
Baucus is very vague on what he would use: "Rates paid to health care
providers by this option would be determined by balancing the goals of
increasing competition and ensuring access for patients to high quality
health care." Baucus, "Call to Action," p. 18.

[32] For
an updated discussion of the existing Medicare debt, see Greg D'Angelo
and Robert E. Moffit, Ph.D., "Congress Must Not Ignore the Medicare
Trustees' Warning," Heritage Foundation WebMemo No. 1869, March 26, 2008, at http://www.heritage.org/research/healthcare/wm1869.cfm.

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